What Is A Secured Loan

If you are looking to obtain a personal loan for certain purposes, one of the ways you can get it is through a secured loan. In barest terms, a secured loan is a form of debt where the borrower offers collateral (of a form acceptable to the lender) to fully cover the principal amount of the loan. By offering the collateral, the borrower gives the lender the right to sell it in the event that the borrower cannot repay the loan amount, and the proceeds from the sale will be used to pay back the money lent.

When you offer collateral, the lender feels secure that the risk of lending money to you will not be too great. Because the collateral is there, the lender will have a way to recover the amount of money lent to you, by forcing the sale of your collateral and getting the proceeds thereon.

That sense of security or of reduced risk is material to your secured loan transaction. The amount of risk exposure is a significant component of the lender's calculations to determine the interest rate to be charged on your secured loan. The closer the perception of risk is to zero, the lower will be the margin of safety that the lender applies to your loan; therefore, the lower will be your interest rate. That should at least reduce the cost of your loan.

In addition, because the lender feels secure about the source of loan repayment, there will be a willingness to allow a longer time for repayment of the loan, depending on the nature of collateral. Secured loans can be given terms of five years or even much longer, if necessary. A lower interest coupled with a longer term will mean the amount of your monthly repayment will be well within your capability to pay. This will be good for your cash flow.

Another good thing about secured loans is that the lender may be more disposed towards giving you a big amount of loan, often equivalent to the valuation of your collateral as estimated by experts. If you need a big amount of money for your plans with the loan, you are more likely to get the amount you need when you put up collateral.

All good things have a downside, and secured loans also have them. One of these is longer processing time. Because of the bigger amounts and the need to make a realistic valuation of the collateral, it may take a number of weeks to get approval for a secured loan. Those who are in a great hurry to raise funds for their plans cannot hope to get such funds from a secured loan.

Another drawback is that the lender's security becomes your insecurity. You now risk losing your collateral in case something happens to make you unable to repay the loan. Once you are in default, the lender can forthwith force the sale of your collateral. If that collateral is your house, you could lose the roof over your head.

Being aware of these drawbacks, you should endeavour to use the money from secured loans properly. This form of personal loan is the best source of funds if you need large amounts for long-term expenditures, such as for improving your home.